How to Budget Your Expenses

HOW TO BUDGET YOUR EXPENSES

Smart Personal Money

Has anyone ever taught you how to budget?

It just hit me one day, that no one taught me how budgeting is done. I have always heard about people preaching the importance of budgeting and highlighting the many reasons to budget. But no one ever taught or shown me how it is done.

This article shares my own 'How to Budget' plan. One which I've written down in my personal journal and I thought I ought to share.

There are only 3 easy steps. It is simple and only requires self-discipline. If you are weak or have no self-discipline at all, you will need to start cultivating it because it will be one of the best habits you carry along your life.

The first step is always the hardest step… hardest because it is the most psychologically challenging thing to do. Some may not even do it because of the immense fear they have to first overcome.

List it!

We’re going to start with listing your financial expenses. The items on the list are essentially the same; they are all considered a cash outflow. For ease of reading, we shall refer to them as ‘outflow’ – where your cash flows out. In this outflow list, there will be 3 types of cash outflows.

(1) Fixed outflow

(2) Fixed-Variable outflow

(3) Variable outflow

You must know how to differentiate between the three because different outflows are managed differently and if you have wrongly identified one of them as the other, just switch them to the right category.

• Fixed outflow refer to things that you have to pay for every single month, and the amount of cash that goes out is fixed. The key is to look for a fixed amount that you are paying. This is the easiest item to identify, look at all the payments you have made from your bank account or from your debit card or credit card.

It will be the amount that is repeatedly paid every month, no exceptions. This may be your hire-purchase payments, mortgage payments or insurance coverage payments and in fact, any type of loans that require repayment and are fixed because it is a debt that you have ‘cooked up’ from a previous purchase. There are some cash-outs that are charged annually (motor insurance or road taxes, etc.), divide those into 12 to obtain a monthly budget.

• Fixed-Variable outflow refer to things that you have to pay for every single month (hence fixed) but the amount may change depending on how much was spent. These are monthly expenses that you are obliged to pay but cannot specifically come up with an exact amount.

It will be your utility expenses, which fluctuates from time to time, and it will be your grocery expenses, which fluctuates as well. Basically these are the expenses which you cannot determine for sure as it will vary. But this is essentially a good thing, because if it varies, it means it can be controlled to a certain extent. So put in the list under Fixed-Variable cashouts and we will review them later.

• Variable outflow refer to cash-outs that needn't be. These include every luxury expenses that you may occasionally 'pamper' yourself with. These are the costs that could've been saved and donated to a hungry 5 year-old girl starving outside the borders of civilization.

You should really be ashamed of yourself that you choose to pamper yourself than to save this 'expenditure' and donate it for their welfare! Get the point? Good.

Write down all of your expenses and put them under the 3 categories above. Start with the largest and work your way down the list. If you think you may not have everything yet, put it aside and when you think of something new that isn't in the list, put it in. It doesn't matter how small an outflow is, just ensure that it is captured in your budget.